21. Israel
As of 2021, there were 625 267 businesses in Israel, 99.5% of which were SMEs (i.e. companies employing up to 100 workers). In an average year, 55 000-60 000 businesses are created and about 50 000 close down. In 2020, 51 436 new companies were established and 38 209 were closed. Removal of government support measures might result in many enterprises shutting down in the post-crisis period.
SME and entrepreneurship policies in Israel are primarily designed by the Ministry of Economy and Industry and implemented by the Israel Innovation Authority (IIA) and the Small and Medium Business Agency (SMBA). While the IIA (formerly known as the Chief Science Office) focuses on leading technology-based start-ups and SMEs, the SMBA caters to all SMEs in Israel’s main economic sectors through business management training and coaching, subsidized access to finance (for example, through the national loan guarantee program) and the work of the business development centres (MAOF centres).
2020 was a very challenging year for Israel's economy due to the COVID-19 crisis. In response, the local government tried to reduce the negative impact of the crisis through the provision of grants, government-guaranteed loans and other relief programs in order to prevent massive deterioration in the local economy.
As of 2018, there were 573,854 businesses in Israel (see Table 20.2) and 99.5% of them were SMEs with up to 100 employees each. Independent workers (without employees) accounted for 51.9% of all businesses. Micro-enterprises (1-4 employees) accounted for 33% of all businesses, and 11.2% of total employment, 11.6% and 18.4% respectively for small businesses (5-19 employees), and 3.1% and 21.4% for medium size businesses (20-99 employees). The rest of 0.5% of the Israeli companies are employing more than 100 workers.
Bank credit is the main funding mechanism for SMEs, while other suppliers of finance, such as funds, private credit companies, angel investors and others, are the secondary suppliers. Most of the banks' credit to SMEs in Israel is provided by its five major banking groups while the rest are negligible. The Central Bank of Israel regulates banks to sort credit data according to business types. However, until 2016, each bank had its own unique definitions regarding business types and sizes. This situation was solved in 2016, as the Central Bank of Israel defined a set of unified business sizes.
Banks
In 2020, Israeli banks provided ILS 280.1 billion in credit to SMEs, an increase of 2.34% compared to 2019 (ILS 273.7 billion). Since 2015, bank credit to small and medium businesses has been higher than to large firms.. In total, from 2010 to 2020, nominal bank credit to the SMEs has increased by 61% vs. 16% to big firms. In 2009, the Israeli banks were required to enlarge their capital target and they have reached their goal in 2017. This process limited their ability to provide credit in those years.
The past year was challenging for SMEs, due to Covid19. In the beginning of the crisis SMEs had difficulties in accessing bank credit, but during March 2020 designated government guaranteed funds were established to help SMEs to cope with the credit crunch. At the same time, the Central Bank of Israel launched monetary plans for credit supply expansion, such as intervention in the bond market, lowering capital requirements in the banking system, creating an infrastructure for broadening the variety of assets that banks could put as securities for credit, postponements of loan payments and more1.
Interest rate data is not officially published but is rather extracted and calculated from the financial statements of the main banking groups in the country, which are required to publish a breakdown of credit distributed according to specific business group sizes. In these statements there is no reference to the average duration or the guarantees of the credit that was given.
The estimated interest rate for small, medium, and large enterprises was obtained by dividing the interest income received from businesses2 by the average credit extended to those businesses’ sector. From 2019 to 2020, interest rates for SMEs and large firms decreased. The average interest rate for SMEs decreased by 21 basis points from 4.02% to 3.81% while the interest rates to large firms diminished from 2.88% to 2.45%. Considering a larger decline in interest rates for large firms, the interest rate spread widened by 22 basis points during this period and now equals 136 basis points.
Handling fees in Israel are charges for handling credit and collateral and apply to loans that are not housing-related. Each major bank has an upper limit on the fees chargeable (see Table 22.5). Until 2012, loan fees applied to loans above ILS 50 000. Since 2013, the base loan amount has been increased to ILS 100 000, although loan fees charged on operations above that amount have remained largely unchanged. Although there are differences among the fees charged by each bank, in the last seven years they have remained stable. All Israeli banks exempt business loans below ILS 100 000 from fees. The figures in the Table 22.5 and 22.6 below are the maximum fees each bank can charge. In principle, however, fees are negotiated on a case-by-case basis.
Apart from those charged by Bank Mizrahi, credit allocation fees for SMEs were the lowest for all banks in 2020 since 2008 and remained the same for the last eighth years, thus providing a stable credit environment for SMEs.
Venture capital
In 2020, total venture capital investment in Israel hit a record annual high of USD 10.18 billion, a 30.5% increase over the USD 7.8 billion raised in 2019. The total capital raised by Israeli high-tech companies has grown since 2015. The COVID-19 influence was evident during Q2, when VC activity declined, but investments increased significantly in Q3 and Q4. Early Round Investments (Seed + A Rounds) took a temporary blow during Q1-Q2 of 2020, due to the uncertainty in the financial markets; however, Q3 and Q4 activity compensated for that The early round investments in Q1 and Q2 in 2020 were USD 307 million and USD 412 million respectively (compared to USD 504 and 449 million in Q1 and Q2 2019). In Q3 2020 early round investments increased to USD 426 million and raised to USD 650 million in Q4 2020.
The number of follow-on investments grew dramatically and continued to increase (which is consistent with the pattern from previous years). As for investors’ geographic origin, foreign investors were much more active in Israel than Israeli investors in 2020.
As companies continue to grow, the size of late stage rounds continues to increase as opposed to early stage, which is revealed after examining the breakdown between deals of early stage and growth stage companies. The trend became apparent in 2017–2018, when the number of deals for growth companies outnumbered deals in early stages. In 2020, the amounts dedicated to late stage companies increased substantially compared to investments in early stage companies. The following figure shows the trend:
Source: Information courtesy of IVC Research Center
The divergent trend in the amount of investment allocated in early and late stages can be explained by the presence of mega deals (over USD 100 million) - which takes place at the late stages-, and that have become common in 2020, making up nearly one third of the total amount. While in number of deals these mega deals did not increase significantly in 2020, the increase in capital raised compared to 2019 is evidenced in an increase in the average mega deal in dollar volume.
In 2020, VC funds continued to be the major source of capital for the Israeli tech. The special characteristics of 2020 contributed to the increase in VCs’ involvement during this year, with their share increasing to 88% of the annual amount from 84% in 2019.
In the last year we saw the trend of diminishing share of Israeli VCs continues as part of the overall VC investments reaching 15% of the total VC investment compared to an average of 18% during 2015– 2020.
In 2020, 10 companies completed their IPO on the TASE3, raising an aggregate of USD 352.3 million compared to none in 2019. The rise in companies completing their IPOs between 2019 and 2020 can be attributed to actions at the CEO level: since 2017 there were improvements in marketing the local TASE to companies from sectors that commonly did not issue in the local market, especially high-tech' while lowering formal bureaucratic demands. In 2020, 7 companies completed their IPO in the US, raising an aggregate of USD1.2 billion compared to 5 companies in 2019 raising USD 407 million.
Source: Information courtesy of IVC Research Center, https://www.ivc-online.com/Portals/0/RC/Magazine%20&%20YB/IVC_Meitar_Israeli_Tech_Review_2020/mobile/index.html
Leasing and factoring
The leasing market in Israel pertains mainly to the automobile sector. In 2020, 6.7% of all cars in Israel (7.2% in 2019) and 27.8% of new cars were owned by leasing companies4 (26% in 2019). There are six public companies together with credit card companies that offer factoring, cheque discounting and loan services for SMEs. These companies are the major suppliers for loan services cheque discounting and factoring. The total credit allocated by the eight public non-banking organizations is estimated at over ILS 5 billion on 20195.
Microfinance and innovative finance
In recent years, a new market for peer-to-peer (P2P) loans has been operating and growing over web platforms that connect debtors and lenders without brokers and other intermediaries. Under P2P lending, borrowers can access better terms and lenders can decrease risk by diversifying their portfolio risk among several project carriers and micro-enterprises. In July 2017, the government approved a law to regulate the actions of Internet companies in this field.
In March 2020 many of the P2P investors were concerned from large number of defaults in companies invested by the platforms, due to the economic distress of the Covid-19 crisis, and the perception that most of the borrowers were rejected to take bank credit. According to the Economic Israeli media, the concern did not come true, mostly because of the grants and Government guaranteed loans, the grace period and the expansion of securities6
Crowdfunding
In March 2017, the Israel Securities Authority completed the enactment of mass financing regulations for research and development companies and SMEs. In November 2017, the Finance Committee of the Knesset approved the Securities Authority's amendment to mass financing regulations. It provides corporations with an additional channel to raise debt or equity (equity is limited to ILS 4-6 million per company per year) through mass financing platforms, without having to reveal their identities.
Non-performing loans
Due to Covid-19, non-performing loans7 as a share of total credit volume increased in all company sizes, mostly for small companies. The crisis affected most companies, due to the closures, that kept many businesses closed or working in partial capacity. Small businesses had difficulties getting bank credit in the beginning of the crisis, in addition to the reduced revenues, a situation that drove many of them to bankruptcies or cutting down number of employees.
According to the Central Bank of Israel large businesses used their credit lines on a large scale in the beginning of the crisis, as a result of the uncertainty about the functioning of the credit markets. Later in 2020, with certainty coming back, many large businesses paid their new debt.
Payment delays, B2B
The SMBA surveys businesses to obtain information on payment delay experiences. In 2019, 47% of the businesses that participated in the survey reported a delay in payments received from clients (56% in 2017). They reported on average a 61-day delay, a deterioration compared to the 53 days reported in 2017. The 2020 survey has not been published yet.
Bankruptcies
From 2009 to 2011, “bankruptcy orders” increased more than 30% year-over-year before reaching a seven-year high of 5 610 in 2013. Between 2013 and 2015, the number of orders filed decreased, reaching 5 175 in 2015. However, in 2016, “bankruptcy orders” increased by 53%, reaching a record high of 7 900. Since 2017, the figure for these orders was not published in the Official Receiver's report. “Receiving orders” are a demand from the court to officially close a bankrupt company. They increased by 390% between 2009 and 2017, reaching 19 906, remained stable in 2018 and decreased in 36% in 2019.8 Data for dissolution requests is available from 2013 and demonstrates that they have remained relatively stable up to 2017, and began increasing in 2018 and 2019 (see Table 22.9).
Government loan guarantees for SMEs
Since 2003, the government has begun issuing loan guarantees to help established and expanding SMEs across all sectors of the economy. Funding from private banks and institutional organs are partly guaranteed by the governmental Loan Guarantee Fund. Under this fund, the Accountant General at the Ministry of Finance and the SMBA operate two coordination companies that assess the business plans for credit applications, conduct due diligence with SMEs and estimate the risk of the loans. According to recommendations from this risk estimation, the fund sets up a dialogue with the bank to determine the loan’s applicable interest rate, define specific loan conditions and approve the loan. The scheme is open to SMEs with annual turnovers of less than ILS 100 million.
The scheme provides a maximum of ILS 500 000 for new businesses or those with annual turnover of less than ILS 6.25 million. For those with an annual turnover between ILS 6.25 million and ILS 100 million, loans of up to 8% of turnover, for exporters up to 12% of turnover can be provided. For industrial businesses, loan provision extends up to 15% of turnover. The loan period is 5 years, or up to 12 years for industrial capital investments. A grace period of six months can be granted for principal payments. The interest rate is determined by the banks for each loan, taking into consideration the government guarantee and the risk of the loan. In addition, the business owner is required to provide his/her personal guarantee. The total loan portfolio is limited to the leveraging ratio agreed upon with each bank.
The programme requires a ratio no lower than 70:30 of outstanding loans for small businesses to outstanding loans for medium businesses.
The SME fund is based on loans executed by banks selected in a tender. The banks leverage the guarantee assigned to them by the government (the portfolio) by up to 11 times. As of March 2016, a new state-guaranteed small and medium-sized business fund was established, replacing the previous fund. Unlike in previous funds, this fund’s source of finance includes institutional funding (for example, from insurance companies and pension funds) in addition to bank funding, in order to expand available credit for businesses. In addition, various improvements have been introduced in favour of businesses, including an increase of the maximum credit limit for exporters and the opening of a designated loan option for industrial capital investments in which long-term 12-year loans can be issued.
In order to help SMEs cope with the COVID-19 crisis, a new enlarged fund was launched in March 2020. The fund offered special terms such as a grace period of twelve months, average interest rate of Prime interest+1.5%, interest payments buy the government for the first year and more. The new fund offered ILS 40 billion, ILS 19.4 billion were approved to 57 003 businesses.
In June 2020, as part of the new fund, ILS 4 billion were allocated to high-risk businesses, with 60% guarantee (as opposed to 15% in existing funds). ILS 1.9 billion were approved to 3 851 businesses.
The Central Bank of Israel launched monetary plans for credit supply expansion, such as intervention in the bond market, lowering capital requirements in the banking system, creating an infrastructure for broadening the variety of assets that banks could put as securities for credit, postponements of loan payments and more.
The government has developed programs to improve employment among targeted populations, notably in the peripheries, by assisting SMEs in the hiring and training of new employees. Additional programs, also sponsored by the government, encourage SMEs to invest in new equipment to increase productivity.
Funds for ethnic groups
SMBA operates different support programs for population groups to encourage entrepreneurship among them.
SAWA Direct Non-Bank Micro Loan Fund
This programme was launched in 2006 by KIEDF, who has been collaborating with the SMBA since 2011. SAWA loans are designated for micro businesses owned by Arabic females. Most of the loans in SAWA are group-guaranteed loans, wherein a group of five Arab women who know one another provide each other with a mutual guarantee and receive micro-loans and business training from the fund.
An additional loan with a group guarantee can be submitted after the previous outstanding loans of all group members are completely cleared. Women who receive a few successful rounds of group loans in this manner may then apply for a personal loan. SMBA provides the resources for the fund alongside KIEDF, an Israeli NGO that provides loans, guarantees, training and business advice for small businesses.
Personal loans are about 14% of the number of loans in the fund and account for about 29% of total loan volume. These loans are offered to new businesses in amounts up to ILS 10 000, with an optional loan of up to ILS 30 000 for entrepreneurs who already have a business activity. One guarantee is required, and the payback period should be no longer than three years. There is no grace period, and the interest rate on personal loans is limited to 9% per year. All participants in the group guarantee loans are charged a ILS 500 fee each year for participating in the programme.
Over the 2011-18 period, SAWA distributed 8 261 loans totalling more than ILS 65 million, out of which 1458 loans totalling NIS 11.6 million in 2018. Only 1.6% of all loans defaulted, and the programme supported the creation and development of 4 600 micro-enterprises.9
In 2019-2020 SAWA distributed approximately 3 000 entrepreneurs totaling NIS 24.2 million.
Ethiopian emigrants fund
This programme was launched in 2017 by KIEDF and SMBA. This fund is designated for entrepreneurs and business owners from the Ethiopian emigrant community.
The fund offers loans up to ILS 50 000, for period of maximum four years, with interest rate of 5%. The entrepreneur must have a single guarantor with income of minimum wage or more.
Over the 2017-2020 period the fund distributed 71 loans totalling approximately NIS 5 million.
Source: See Table 21.11.
References
Financial statement of Israeli banks and credit cards companies:
http://www.boi.org.il/he/BankingSupervision/FinancialReports/Pages/Default.aspx
Accountant general, Israeli ministry of finance:
http://mof.gov.il/AG/FinancingAndCredit/StateGuarantees/Documents/BusinessLoansFound.pdf
Credit allocation fees in Israel available under:
https://www.leumi.co.il/home01/commissions_and_fees/9046/
https://www.bankhapoalim.co.il/wps/portal/PoalimPrivate/taarifone
https://www.mizrahi-tefahot.co.il/he/Bank/Pages/interest-list.aspx
https://www.discountbank.co.il/DB/private/general-information/price-list-and-hiking-fees
https://online.fibi.co.il/wps/portal/FibiMenu/Marketing/AnNote/AnInformation/AnCommissionsRate
Venture capital investments in Israel:
Israel Venture Capital Research Centre:
https://www.ivc-online.com/Portals/0/RC/Magazine%20&%20YB/IVC_Meitar_Israeli_Tech_Review_2020/mobile/index.html
Summary of Israeli High-Tech Company Capital Raising 2020, IVC Research Center
Ministry of Justice, the Official Receiver report
https://www.gov.il/he/departments/publications/reports/summary_activities_2019
Notes
← 1. Bank of Israel Annual Report 2020, chapter 4 https://www.boi.org.il/he/NewsAndPublications/RegularPublications/Pages/DochBankIsrael2020.aspx
← 2. Interest income from external sources
← 3. The TASE is the “home market” for Israeli companies interested in raising capital from the public through the issue of securities, bonds and convertible securities. For more information visit: https://info.tase.co.il/Eng/listings_ipo/listing_securities/Pages/first_ipo.aspx
← 4. Israel Central Bureau of Statistics Media Releases from 29-4-2021: Motor Vehicles In Israel In 2020
https://www.cbs.gov.il/en/mediarelease/Pages/2021/Motor-Vehicles-in-Israel-in-2020.aspx
← 5. Ministry of Finance release https://www.gov.il/BlobFolder/dynamiccollectorresultitem/periodic-review-28122020/he/weekly_economic_review_periodic-review-28122020.pdf
← 6. BTB (p2p platform) Investor presentation
https://drive.google.com/file/d/14CIvGoBPj-MgvH6XU82qVqrA75UC0Kh8/view
← 7. Non-performing loans are damaged debts which had been defined by the Bank of Israel as debts expected not being able to collect by the bank
← 8. One reason for this increase is a tendency of reduction in bankruptcy procedures and simplicity of the processes in order to give second chance for entrepreneurs. The reform in bankruptcy procedures has started in 01.09.2013 and includes simplification of procedures and shorten the time of bunkrupcs.
← 9. According to data received from the Ministry of Economy and Industry